HONG KONG COURT FINDS ENFORCEMENT OF ARBITRAL AWARD TIME BARRED

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In CL v SCG [2019] HKCFI 398, the Hong Kong Court of First Instance found that enforcement of a 2011 arbitral award by CL was time barred, clarifying when a cause of action for failure to honour an award accrues and the effect of the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region (the “Mainland and Hong Kong Arrangement“) on time limits under the Hong Kong Limitation Ordinance.

Background

SCG entered into a contract containing an arbitration clause with CL. CL later commenced arbitration under the contract, submitting the dispute to the HKIAC. In 2006, the tribunal issued a partial award holding that it had jurisdiction with respect to certain claims and in February 2011, it issued a second partial award ordering SCG to pay CL US$2,173,000 plus interest and costs. On 18 March 2011, CL demanded immediate payment from SCG, however no payment was made. In July 2011, CL applied to the Shenzhen Intermediate People’s Court to enforce the award and SCG filed a submission opposing this. In March 2015 the Shenzhen Court rejected CL’s application for enforcement and CL applied to the Guangdong Higher People’s Court for a retrial. CL’s application for a retrial was rejected on 1 March 2016. In February 2018, CL applied to the Hong Kong Court for leave to enforce the award and leave was granted. In June 2018, SCG applied to set aside the order granting leave on the basis that the application was time barred under section 4(1)(c) of the Limitation Ordinance (Cap 347). Section 4(1)(c) provides that ‘actions to enforce an award’ cannot ‘be brought after the expiration of 6 years from the date on which the cause of action accrued’.

While SCG and CL agreed that the 6 year time limit applied, they disagreed with respect to the date on which the cause of action accrued. CL made the following arguments with respect to accrual of the cause of action:

The cause of action accrued when SCG clearly and unequivocally demonstrated an intention to resist enforcement by opposing CL’s application to the Shenzhen Court in March 2012.

In the alternative, CL argued that Article 2 of the Mainland and Hong Kong Arrangement prohibited them from applying for enforcement of the award in the courts of the Mainland and Hong Kong at the same time. CL argued that time only resumed on their cause of action on 1 March 2016, when the Guangdong Higher People’s Court rejected their application for a retrial.

Decision

Rejecting CL’s two arguments, the Court held that the application for enforcement of the award was time barred.

With respect to CL’s first argument, the court rejected the proposition that a cause of action for enforcement of an arbitral award is only accrued when the party required to pay ‘demonstrates a clear and unequivocal intention not to be bound by the Award and its obligations under the Award’, as this would allow that party to indefinitely defer the date of accrual. Instead, it held that the cause of action based on the implied obligation to honour the award accrued when SCG failed ‘to make payment within a reasonable time of the publication of the Award and demand being made.’ In determining what constitutes a ‘reasonable time for payment and performance’, the court held that this ‘depends on the terms of the award as well as the facts and circumstances of the case.’ In this case it was held that 21 days after the date of the first demand for payment was a reasonable time and therefore, the 6 year limitation period expired on 8 April 2017. In reaching this conclusion, the court noted that the award ordered payment ‘forthwith’, suggesting a degree of immediacy.

With respect to CL’s second argument, the court held that ‘there is no express provision in the Arrangement, the relevant Arbitration Ordinance, or the [Limitation] Ordinance itself, that time limitation for enforcement of an arbitral award should not run during the period when a successful party to an arbitral award applies for enforcement on the Mainland.’

Discussion

This decision clarifies the date on which a cause of action accrues where a party fail to honour an arbitral award. In particular, it provides guidance on what will constitute a ‘reasonable time for payment and performance’. It also clarifies that, despite the prohibition under the Mainland and Hong Kong Arrangement that enforcement proceedings cannot be brought in the Mainland and Hong Kong in parallel, the time continues to run in Hong Kong under the Limitation Ordinance while enforcement proceedings are before Mainland courts. This decision, together with the 2-year time limit for the application for enforcement in the Mainland and the likely duration of the enforcement proceedings in Hong Kong and the Mainland respectively should all form part of the careful consideration when the parties develop their enforcement strategy.

Herbert Smith Freehills LLP is authorised and regulated by the Solicitors Regulation Authority.

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